U.S.-Canada Paper Dispute Shows Unintended Results of Import Tariffs

In the end, the Maine mill that sought the tariff shut down

By Jennifer Levitz. From the WSJ. Excerpts:

"For decades, the U.S. paper industry has been losing jobs, hurt by forces beyond foreign competition. Other factors include automation, turnover among owners and eroding paper demand, as many products are increasingly accessed on computers and smartphones. Paper manufacturing employs nearly 370,000 people in the U.S., down 20% from a decade ago, according to the Bureau of Labor Statistics.

Those same obstacles are troubling Canadian mills. In 2011, a plant in Port Hawkesbury, Nova Scotia filed for bankruptcy and laid off close to 600 workers. The plant made so-called supercalendered paper, a glossy stock used for magazines, catalogs and newspaper inserts. But it was able to restart production a year later, thanks to an aid package from the Canadian province worth nearly 125 million Canadian dollars.

In early 2015, Madison Paper Industries and Memphis-based Verso Corp., two U.S. producers of supercalendered paper, petitioned the U.S. government, alleging the Port Hawkesbury mill across the border was benefiting from unfair subsidies that led to depressed U.S. prices. Elected officials from U.S. paper-producing states jumped to their defense.

“As we like to say, we can see Canada from  our porch,” Sen. Amy Klobuchar (D., Minn) testified at a fall 2015 hearing by the U.S. International Trade Commission on the matter. “They are our friends, they are our neighbors, but in this case, this is unfair.”

The North American Free Trade Agreement, the pact between Canada, the U.S. and Mexico that took effect in 1994, eliminated most tariffs. Exceptions were made to combat so-called dumping—the sale of products at a lower value in the foreign market than in the domestic market—and to offset subsidies that benefit a particular industry.

The International Trade Commission and Department of Commerce sided with the U.S. mills, and in December 2015 the U.S. government imposed tariffs of up to roughly 20% on purchases of imported Canadian supercalendered paper. The tariff was based heavily on the U.S. government’s conclusion that the Port Hawkesbury mill received a special break on its electricity costs in a contract approved by a provincial regulator. Energy is often a paper mill’s biggest expense.

Port Hawkesbury’s owners say the power rate was negotiated with another private company and wan’t a subsidy. The tariff was  “grossly unfair,” said Neil de Gelder, the executive vice president of Stern Partners, Inc., a Vancouver, Canada investment firm that owns the controlling interest in the Port Hawkesbury mill.

The impact hit in ways that hadn’t been anticipated. Maine Gov. Paul LePage, a Republican, said it inadvertently hurt Maine outposts of Canadian paper producers that employ more than 1,200 people. One of them, British Columbia-based Catalyst Paper, which has a mill in Rumford, Maine and also has workers in Wisconsin, Ohio and Washington state, estimates it has lost millions from duties and legal costs and that its competitiveness was reduced.

The Commerce Department is now planning to readjust the tariffs for Catalyst and another mill. A final decision expected in February.

In the end, the tariff on the Canadian paper company wasn’t a cure-all for the two Americans mills that advocated for it. Besides Madison closing its mill, Verso Corp. plans to lay off about 190 workers, or a third of the workforce, at a coated-paper mill in Jay, Maine this quarter, said spokeswoman Kathi Rowzie. The company is still running its supercalendered paper mill in Minnesota, however.

“The lesson is the same one we’ve seen many times,” said William Reinsch, who works on trade policy at the Stimson Center and was the former president of the National Foreign Trade Council. “You mess with the market, there are always unexpected developments.”"